Homeownership: A Continuing American Dream

2001-2002 Student Essay Contest Winner

2001-02 Student Essay Contest Question

Is there a housing shortage? What role should the government play in the housing market?

Housing plays a vital role in people's lives, as everyone needs
a roof over his or her head. Questions arise, however, when families
have difficulty finding housing they can afford. In this year's
Minneapolis Fed essay contest, high school students were asked to use
their economics knowledge to analyze the housing market and determine
the appropriate role of government. Essays were received from students
in all six Ninth District states; below is the winning essay.

The strength of a nation lies in the homes of its people.
—Abraham Lincoln1

The America of the 2lst century is a far different country than it was
in the mid-1800s. However, many of our nation's characteristics have
remained constant throughout its history, and Lincoln's statement still
holds true today: Americans have always dreamed of having their own
home. Currently, we are one of the best-housed nations in the world.2
However, despite this achievement, we still face a formidable challenge.
One of every seven American families has a severe housing need: 13.7
million families are homeless, spend more than 50 percent of their income
for housing and/or live in a unit with severe physical problems.3
Government has tried to resolve this chronic problem in many ways, but
its dominant focus has been to increase either public or subsidized
rental housing for those who face a housing shortage. Unfortunately,
these programs have been more of a bandage than a cure to the problem.
In order to truly make progress within this issue, the government must
return to our country's ideals of independence, individual initiative
and self-ownership. In the future, to strengthen the economic and personal
condition of our nation's citizens, the federal government should focus
its energies upon encouraging the American dream of homeownership.

The housing market today presents the question: Does a housing shortage
currently exist? Yes and no. In the purest or perhaps most simplified
sense, a shortage is "the amount by which the quantity demanded exceeds
the quantity supplied at a particular (below-equilibrium) price."4
Under that definition, the housing market outside government price controls
contains no shortage. It has simply followed the instructions of supply
and demand, and has reached equilibrium(s) at the current prices of housing.
However, at today's equilibrium price many families are without access
to affordable housing.5
What about these people? Wouldn't there be some benefit if they also had
housing? In fact there is. Beyond a moral imperative, achieving affordable
housing for those with a housing need is economically beneficial because
of externalities in the market. The externalities in this case—spillover
benefits—are the economic and social benefits to society created
each time a family has housing.6
These "free" benefits resulting from housing include economic
growth and stability, reduced crime and abuse, increased literacy and
job training, and improved public health.7
The market demand curve, displaying only private benefits, fails to recognize
these spillover benefits. This understatement of total benefits causes
an underallocation of resources to the product—housing.8
In this way, there exists a failure of the housing market that government
should correct in order to restore a true market equilibrium.

Today many of the government's most prominent and costly policies to correct
this housing shortage involve the encouragement of rental housing for
low-income citizens. This policy is carried out largely through programs
like the federal Section 8, which subsidizes both
low-income housing providers and tenants.9Unfortunately, policies concentrating on rental properties
have serious flaws. By subsidizing landlords who provide low-income housing,
the government must essentially set price levels, disturbing the free
market and giving landlords either excessive profits or inadequate income
below the market value of the housing.10 In addition, rental systems often
result in the degradation of the housing, as neither the tenant nor the
owner (who wishes to avoid repair costs that eat into the already small
profits from low-income rent) has self-interest to maintain the property.

In the future, the federal government should move away from
rental-housing-based policies and instead encourage private homeownership
for those with housing needs. It should do so by building, encouraging
and relying upon the housing finance programs that promote ownership through
the expansion of the availability of home mortgages and the lowering of
down payments and interest rates. This type of policy would expand resources
and opportunities for citizens and lessen bureaucratic micromanagement
of the housing market.

The U.S. Department of Housing and Development (HUD) should take several
important steps. First, FHA-insured loans and other similar loan insurance
programs should be streamlined and expanded. Many families can afford
a mortgage's monthly payments, but would have to wait decades to save
around $20,000 for a traditional down payment. The FHA loan's extremely
low down payment eliminates this obstacle to homeownership 11
and raises the value of the home that households can afford.12

Second, HUD-Insured Reverse Mortgages for Elderly Homeowners, which will
be especially significant as America's population ages, should also be
extended. These mortgages allow the elderly to retain ownership of their
homes; they are able to borrow against their home equity for needed income,
which is later repaid when the owner sells the home or passes away.13

Finally, HUD and the government should continue to encourage Fannie Mae
and Freddie Mac to increase the stability, liquidity and volume of the
mortgage market. These two government-sponsored enterprises have tremendously
expanded the availability of loans for those with housing needs, especially
since 2001, when new housing goals set by HUD further increased their
lending to moderate and low-income families.14

The expansion and encouragement of these programs would dramatically increase
the affordability of mortgages for those with housing needs. This advance,
coupled with the knowledge of the responsibilities that homeownership
entails, would allow thousands of families to buy and retain their own
homes. Of course, homeownership is not a balanced housing solution for
everyone in need. However, it would be invaluable to many, especially
to the 22 percent of all households with severe housing needs that are
moderate-income working families.15

The benefits from increased homeownership are immense. Households buying
a home not only finally achieve affordable housing, but also take a huge
step toward financial strength and independence. Homeownership is the
primary and fundamental means of an American household's accumulation
of wealth, with home equity on average making up just over half of the
total equity of a household.16
Americans currently renting are those who most acutely need to take this
step toward savings and wealth. According to the U.S. Census Bureau in
1999, of the families renting apartments in buildings with five or more
units, 73.8 percent had incomes under $40,000; 37.5 percent had incomes
under $20,000.17 George
Karvel, professor at the University of St. Thomas, explains the benefits
of ownership over renting: "If you buy a home, you pay each month,
and in 35 years or so, you own a home. If you rent, you pay each month,
and at the end of 35 years, you are only left with a stack of rent receipts.18
Further increasing the economic benefits of homeownership, mortgage interest
and real estate taxes on houses and condominiums are tax-deductible, whereas
rent is not. Additionally, due to exploding rent prices, many working
families with severe housing needs today would pay less for mortgage payments
than they currently pay for rent.19

Homeownership also bestows tremendous intangible benefits upon communities.
By owning a home, Americans are able to realize an enduring element of
the American dream. They have a vested interest in improving their home
and community, which greatly advances civic pride and participation in
the local and state community.20
As Charles Dickens said, "In love of home, love of country has its
rise."21

Since the founding of our nation, homeownership has been one of the foundations
of the American dream. Thomas Jefferson bought the Louisiana Purchase
with the vision of a country based upon independent citizens with their
own land and homes; 60 years later, the 1862 Homestead Act continued these
ideals.22 Millions of
immigrants, leaving behind countries where land ownership was largely
a prerogative of the aristocracy, have come to America to realize their
dreams of someday owning homes themselves. America has always been a land
of change, but the American dream of homeownership continues to endure.
Today, our government should support policy to continue this dream and
expand its reality to more Americans. Doing so would not only help resolve
our nation's housing problem but would also provide for the increased
prosperity and improved condition of its citizens and the continued affirmation
of American ideals.